Health Insurers Pursue Growth Potential of Individual Market

November 4, 2009

Insurers are pursuing strategies to tap the growth potential of the individual health insurance market, including entering less-regulated markets and developing lower-cost, less-comprehensive products targeting younger, healthy consumers, according to a study released today by the Center for Studying Health System Change (HSC).

As the only source of health coverage for people without access to employer-sponsored insurance or public insurance, the individual insurance market has traditionally attracted older, sicker individuals who perceive the need for insurance more than younger, healthier people. The attraction of a sicker population to the individual market creates adverse selection, leading insurers to employ medical underwriting—which most states allow—to either avoid people with the greatest health needs or set premiums more reflective of their expected medical use.

Recently, however, several factors have prompted insurers to recognize the growth potential of the individual market—a declining proportion of people with employer-sponsored insurance, a sizeable population of younger, healthier people forgoing insurance, and the likelihood that many people receiving subsidies to buy insurance under proposed health reforms would buy individual coverage, according to the study funded by the Robert Wood Johnson Foundation (RWJF).

“The current strategies insurers are pursuing in the individual market are unlikely to meet the needs of less-than-healthy people seeking affordable, comprehensive coverage,” said HSC President Paul B. Ginsburg, Ph.D., coauthor of the study with HSC Health Research Analyst Elizabeth A. November, J.D., M.P.H.; HSC Health Research Assistant Genna R. Cohen; and Brian Quinn, RWJF assistant vice president, Research and Evaluation.

“If enacted, current health reform proposals, which envision a larger role for the individual market under a sharply different regulatory framework, would likely supersede insurers’ current strategies,” Ginsburg said.

To examine insurers’ strategies in the individual market, information was collected from the 12 communities followed by HSC since 1996—Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y. Between August and December 2008, researchers conducted 72 interviews, including one to three insurance executives and an insurance broker in each community, along with a representative from the state insurance commissioner’s office. Additional interviews were conducted with representatives of state health plan associations, consumer advocacy organizations, national health plans and national associations representing the insurance industry and insurance brokers.

The study’s findings are detailed in a new HSC Research Brief—Individual Insurance: Health Insurers Try to Tap Potential Market Growth—available at www.hschange.org/CONTENT/1093/. Other key study findings include:

In the 12 communities, the individual market tends to be dominated by mainstream insurers—those whose greatest portion of business is in the group market as opposed to the individual market. Typically, a Blue Cross Blue Shield plan holds the greatest market share. In about half of the markets, specialized insurers—those focusing on the sale of nongroup policies—are among the top three competitors.

States regulate the individual market, and regulations vary widely across the country. Key regulations regarding individual insurance pertain to the scope of insurers’ underwriting and product pricing, as well as their ability to limit access to coverage. A state’s regulatory environment creates a climate that is more or less welcoming to insurers and protective of consumers.

In the markets studied with the most-restrictive regulatory environments—Boston, northern New Jersey, Seattle and Syracuse—respondents observed that fewer insurers are interested in competing for individual business. In these markets, individual products are offered almost exclusively by mainstream insurers, and new market entrants have been few in recent years.

Study markets with less-restrictive regulatory environments—Cleveland, Greenville, Little Rock and Phoenix—have seen the greatest number of new entrants in the individual market in recent years and a greater diversity of insurers, including both mainstream and specialized insurers.

Insurers are focusing on offering lower-cost benefit structures—particularly high-deductible and limited-benefit products—and targeting lower-risk populations in less-regulated markets. This focus, while appealing to healthy consumers, may fail to provide adequate coverage for enrollees over time and may make individual insurance inaccessible to those with the greatest health needs.

National health reform could radically transform the individual insurance market. Current reform proposals include subsidies for lower- and moderate-income people to buy insurance, creation of insurance exchanges and much stricter regulation of the individual market. Proposed regulatory changes include a mandate for individuals to be covered, guaranteed-issue requirements, a ban on medical underwriting, use of modified community rating, which prohibits using a person’s health status to set premiums but allows other factors such as age and gender to affect premiums, and products standardized by actuarial value, or the covered medical expenses estimated to be paid by the insurer. For insurers, the mandate requiring individuals to purchase insurance would be key to protecting against adverse selection.

About the Robert Wood Johnson Foundation
The Robert Wood Johnson Foundation focuses on the pressing health and health care issues facing our country. As the nation's largest philanthropy devoted exclusively to improving the health and health care of all Americans, the Foundation works with a diverse group of organizations and individuals to identify solutions and achieve comprehensive, meaningful and timely change.

About the Center for Studying Health System Change
The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded in part by the Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research.

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